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TANEJA v FC of T

Members:
SE Frost M

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2009] AATA 773

Decision date: 8 October 2009

SE Frost (Member)

Introduction

1. Following a hearing in December 2008, the Tribunal published its decision and reasons, dealing with a number of matters in dispute between the parties, on 11 February 2009:
Re Taneja and Commissioner of Taxation 2009 ATC 10-078; [2009] AATA 87 ("the Earlier Decision"). In summary, it was decided that the company of which Mr Taneja was the director was not conducting a "personal services business" during the income years 2002, 2003, 2004 or 2005. The effect of the Earlier Decision

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was that some of the income of the company was attributed to Mr Taneja personally, under Part 2-42 of the Income Tax Assessment Act 1997 ("the 1997 Act"). It followed, also because of Part 2-42, that Mr Taneja's assessable income could not be reduced by certain wages expenses or superannuation contribution amounts.

2. Some issues between the parties were not resolved by the Earlier Decision, but were remitted to the Commissioner for further reconsideration. Mr Taneja remains dissatisfied with the outcome of the Commissioner's further reconsideration of some of those issues, and he has asked that the Tribunal determine them.

3. Following the filing of written submissions, the parties were given the opportunity to make oral submissions on these outstanding issues on 24 August 2009. Set out below are the issues and my reasons for determining them in the way that I have.

Outstanding issues

4. There are three issues that I have to deal with:

  • 1. Whether, notwithstanding the Earlier Decision, the assessments made by the Commissioner cannot be sustained because they are less favourable to the taxpayer than a public ruling on the same topic;
  • 2. Whether Mr Taneja is entitled to a tax rebate, under the former s 159T of the Income Tax Assessment Act 1936 ("the 1936 Act"), for a superannuation contribution made on behalf of his wife; and
  • 3. Whether administrative penalties were correctly imposed; if they were, whether they should be remitted, and if so, to what extent.

Issue 1 - The public ruling issue

5. The thrust of Mr Taneja's contention is that the assessments which the Commissioner made, and which were effectively upheld by the Earlier Decision, are less favourable to him than the position that is set out in one of the Commissioner's public rulings, TR 2001/8 - in particular, at paragraphs 108, 131, 136 and 138. Mr Taneja relies on the former s 170BA(3) of the 1936 Act, which provided, in summary, that an amount of tax assessed to a taxpayer cannot exceed the amount that would be assessed on the basis of what is set out in a public ruling. That provision is conditional on there being "a public ruling on the way in which an income tax law applies to a person in relation to an arrangement". The question is whether the relevant parts of TR 2001/8 fit that description.

6. A threshold question is whether Mr Taneja should be allowed to agitate this issue at such a late stage. In fact, the issue had been included in Mr Taneja's written submissions filed prior to the first hearing day in December 2008. The Tribunal rejected Mr Taneja's argument, but we did not refer to our conclusion, or our reasons for it, in the Earlier Decision. Mr Taneja clearly regards this as an important issue, and it is desirable that he should be given reasons for the rejection of his argument.

7. The expression "public ruling" used in s 170BA took the meaning that it had in Part IVAAA of the Taxation Administration Act 1953 ("the Administration Act"). Section 14ZAAA, in Part IVAAA of the Administration Act, provided that a "public ruling" was a ruling under s 14ZAAE, 14ZAAF or 14ZAAG. Section 14ZAAE provided as follows:

"The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to any person in relation to a class of arrangements."

8. Section 14ZAAI provided:

  • "(1) The Commissioner makes a public ruling by publishing it, and publishing notice of it in the Gazette.
  • (2) A public ruling must:
    • (a) state that it is a public ruling for the purposes of this Part; and
    • (b) include a number and a subject heading by which it can be identified.
  • (3) The notice in the Gazette must include:
    • (a) the number and subject heading by which the public ruling is identified (see subsection 14ZAAI(2)); and
    • (b) a brief description of the public ruling."

9. The Commissioner contends that the paragraphs of TR 2001/8 on which Mr Taneja relies do not form part of the public ruling. This

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is because of the following introductory words of TR 2001/8:

"The number, subject heading (the title), Class of person/arrangement , Date of effect and Ruling parts of this document are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1t and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner."

10. Paragraphs 108, 131, 136 and 138 do not appear in any of the Class of person/arrangement , Date of effect or Ruling parts of TR 2001/8, but in a separate section with the title Explanations , commencing at paragraph 104 and continuing through to paragraph 267.

11. The Commissioner's written submissions said at [10]-[11]:

"[10] Contrary to the submissions of the applicant, there is no legislative prohibition on the Commissioner proceeding in this way. The decision to issue public rulings is a discretionary one: e.g. s 358-5(1) - 'The Commissioner may make a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply …'. Accordingly, the Commissioner is entitled to distinguish, in the one publication, between statements subject to the ruling regime and statements that will bind the Commissioner in an administrative manner only.

[11] Secondly, and in any event, the paragraphs relied upon by the applicant are not inconsistent with the construction of Pt 2-42 propounded by the Commissioner when read in the context of TR 2001/8 as a whole. At no stage in that document does the Commissioner indicate that the common law principles governing independent contractors are determinative of the operation of the 'results test'. The document merely states that: '[t]he results test is based on the tests used to distinguish independent contractors from employees.' " (emphasis in the original)

12. Mr Taneja does not accept that only part of TR 2001/8 constitutes a ruling "when the whole of TR 2001/8 discusses the Commissioner's interpretation of the relevant Legislation". He submits that:

"The Commissioner published TR 2001/8 as the Ruling, so there can be no doubt that the whole of TR 2001/8 constitutes a public ruling as defined by Section 14ZAAA."

13. The Commissioner's submissions are correct, and Mr Taneja's are misconceived. The Explanations section of TR 2001/8 does not form part of the ruling, as the introductory words of the document make clear. An examination of the whole of the text of TR 2001/8 shows that the Commissioner did not include the Explanations section as part of the formal ruling (see [9] and [10] above) for the very reason that the paragraphs in that section do not deal with "the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to any person in relation to a class of arrangements" (s 14ZAAE). Those paragraphs deal, instead, with the Commissioner's reasons for the conclusions in the Ruling part. In broad terms, the Ruling part sets out how the tax law applies; the Explanations part sets out why it applies in that way. The effect of s 14ZAAI(2)(a) is that the paragraphs of TR 2001/8 on which Mr Taneja seeks to rely do not form part of the public ruling.

14. In any event, there is nothing in those paragraphs to support methods of assessment of Mr Taneja's income that are more favourable than the actual assessments made. The paragraphs are pitched at such a level of generality that no specific impact on Mr Taneja's circumstances can be identified. I agree with what is said in paragraph 11 of the Commissioner's submissions, as set out in [11] above. Mr Taneja's submissions in relation to the public ruling issue cannot be sustained.

Issue 2 - The claimed rebate under s 159T

15. The Tribunal held in the Earlier Decision, at [60], that Mr Taneja's assessable income could not be reduced by reference to amounts of superannuation contributions made by his company, R S Consulting Pty Ltd ("the Company"), in respect of Mr Taneja's wife.

16.

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Mr Taneja now contends that he is entitled to a rebate of $540 in each of the income years under review in relation to these superannuation contributions. This claim is based on the former s 159T and s 159TC of the 1936 Act.

17. The rebate is available under those former provisions if, among other things, "the taxpayer has a spouse in relation to whom he or she makes one or more eligible spouse contributions" (s 159T(1)(a)). The expression "eligible spouse contributions" is defined (s 159TC) to mean, in relation to a taxpayer, "contributions made by a taxpayer in relation to a person who is the taxpayer's spouse at the time those contributions are made …".

18. The problem for Mr Taneja is that the contributions were not made by him, but by the Company. During the hearing I indicated to Mr Taneja's representative that, unless he could show that Mr Taneja himself made the contributions to the superannuation fund, or that Mr Taneja reimbursed the Company for the contributions that it made, Mr Taneja would not be entitled to the rebate. Mr Taneja could not show that either of those two things happened.

19. Mr Taneja argues that "the payment[s] were made from the statutory (and assessable income) of [Mr Taneja]" and that they were made "out of funds, belonging to Mr Taneja, for purposes of income tax law". But neither of those propositions has been established. The facts are that the Company derived income; that some of that income is attributed to Mr Taneja; and that the Company made superannuation contributions on behalf of Mr Taneja's wife. That last-mentioned fact is fatal to Mr Taneja's claim.

20. The rebate under the former s 159T of the 1936 Act is not available.

Issue 3 - administrative penalty

21. In respect of the income years 2004 and 2005, administrative penalty was imposed under s 284-75(1) in Schedule 1 to the Administration Act, on the basis that there was a shortfall amount arising from a false or misleading statement made to the Commissioner. By reference to item 3 in the table in s 284-90, the penalty is 25% of the shortfall because, so it is claimed, it was caused by a failure on the part of Mr Taneja or his agent to take reasonable care to comply with a taxation law.

22. As far as the two earlier income years, 2002 and 2003, are concerned, the Commissioner's objection decision indicates that, while penalty was imposed for those years as well, it was remitted in full, in recognition of a general leniency shown to taxpayers in the first few years of the so-called New Tax System, of which Part 2-42 of the 1997 Act is said to form a part.

23. The claimed failure to take reasonable care arises from the non-disclosure in Mr Taneja's tax returns of the income attributed to him under Part 2-42 of the 1997 Act. The Commissioner says that the factual matrix in Mr Taneja's case, like that of the taxpayer in
Fowler v Federal Commissioner of Taxation 2008 ATC 20-022; [2008] FCA 528; (2008) 167 FCR 425, clearly falls within the terms of Part 2-42. The Commissioner's written submissions continued at [16]:

"The submissions of the applicant before the Tribunal were unorthodox and generally bespoke a lack of understanding of fundamental aspects of the [personal services income] regime [in Part 2-42]. The applicant's reliance on TR 2001/8 and the public statements of the then Treasurer of Australia were similarly without foundation."

24. It is clear that Mr Taneja relied on the advice given to him by his tax agent. It can be inferred that the position taken in Mr Taneja's tax returns is the position that his agent advised him to take. As the Tribunal has found, that position was the wrong one to take, and the statements that were made to the Commissioner (in which income properly attributed to Mr Taneja was omitted from the returns) were false or misleading in a material particular: s 284-75(1)(b). But it does not follow that the taxpayer, or the agent, failed to take reasonable care to comply with a taxation law. The taxpayer, in fact, did take reasonable care, by asking his agent for advice.

25. It is evident from the way Mr Taneja's case was conducted here, that the agent (who represented Mr Taneja in the Tribunal) based his advice on his understanding of the legislation, supplemented by what he read in

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TR 2001/8, and the comments that the Treasurer made in his doorstop interview (paragraphs 11-18 of the Earlier Decision). He also said, during the hearing, that he relied on the decision of the Federal Court in
Commissioner of Taxation v Metaskills Pty Ltd 2003 ATC 4644; [2003] FCA 766; (2003) 130 FCR 248, and while it is perhaps unorthodox for the Tribunal to rely on such a statement made from the bar table, I did not understand counsel for the Commissioner to complain either about the making of the statement or about the content of it. In my view, those actions amount to the exercise of reasonable care on the part of the agent. The "failure" on the part of the agent, if there is one, is a failure to understand fully the effect of Part 2-42 on his client's affairs. But the failure to understand does not equate to a failure to take reasonable care. The steps that the agent took are consistent with the extent of "reasonable care" that one would expect of a registered tax agent.

26. I conclude that there was no failure to take reasonable care on the part of either the taxpayer or the agent and therefore item 3 in the table in s 284-90 in Schedule 1 to the Administration Act does not apply. As a result, Mr Taneja is not liable to an administrative penalty.

Conclusion

27. The objection decisions in relation to the imposition of administrative penalty for the income years 2004 and 2005 are set aside. Instead the Tribunal decides that, to that extent only, the taxpayer's objection is allowed.

28. The remaining objection decisions are affirmed.


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